Sunday, October 01, 2006

Top ten geek business myths

Since I've started my new career as a venture capitalist I have become keenly aware of some of the classic mistakes that geeks make when trying to raise money for a new business. Instead of writing the same comments over and over again I thought I'd try to summarize some of the mistakes that people -- especially smart people -- make when they decide to try to turn their bright ideas into money. Here then is my top-ten list of geek business myths:

Myth #1: A brilliant idea will make you rich.

Reality: A brilliant idea is neither necessary nor sufficient for a successful business, although all else being equal it can't hurt. Microsoft is probably the canonical example of a successful business, and it has never had a single brilliant idea in its entire history. (To the contrary, Microsoft has achieved success largely by seeking out and destroying other people's brilliant ideas.) Google was based on a couple of brilliant ideas (Page rank, text-only ads, massive parallel implementation on cheap hardware) but none of those ideas were original with Larry or Sergey. This is not to say that Larry, Sergey and Bill are not bright guys -- all three of them are sharper than I can ever hope to be. But the idea that any of them woke up one day with an inspiration and coasted the rest of the way to riches is a myth.

Myth #2: If you build it they will come.

There is a grain of truth to this myth. There have been examples of businesses that just built a product, cast it upon the ether(net), and achieved success. (Google is the canonical example.) But for every Google there are ten examples of companies that had killer products that didn't sell for one reason or another. My favorite example of this is the first company I tried to start back in 1993. It was called FlowNet, and it was a new design for a high speed local area network. It ran at 500Mb/s in a time when 10 Mb/s ethernet was the norm. For more than five years, FlowNet had the best price/performance ratio of any available network. On top of that, FlowNet had built-in quality-of-service guarantees for streaming video. If FlowNet had taken over the world your streaming video would be working a lot better today than it does.

But despite the fact that on a technical level FlowNet blew everything else out of the water it was an abysmal failure as a business. We never sold a single unit. The full story of why FlowNet failed would take me far afield, but if I had to sum it up in a nutshell the reason it didn't sell was very simple: it wasn't Ethernet. And if we'd done our homework and market research we could have known that this would be, if not a show-stopper at least a significant obstacle. And we would have known it before we spent tens of thousands of dollars of our own money on patent attorneys and prototypes.

Myth #3: Someone will steal your idea if you don't protect it.

Reality: No one gives a damn about your idea until you actually succeed and by then it's too late. Even on the off chance that you do manage to stumble across someone who is as excited about your idea as you are, if they have any brains they will join you rather than try to beat you. (And if they don't have any brains then it doesn't matter what they do.)

Patent protection does serve one useful purpose: it can make investors feel warm and fuzzy, especially naive investors. But I strongly recommend that you do your own patent filings. It's not hard to do once you learn how (get the Nolo Press book "Patent it Yourself"). You'll do a better job than most patent attorneys and save yourself a lot of money.

Myth #4: What you think matters.

Reality: It matters not one whit that you and all your buddies think that your idea is the greatest thing since sliced pizza (unless, of course, your buddies are rich enough to be the customer base for your business). What matters is what your customers think. It is natural to assume that if you and your buddies think your idea is cool that millions of other people out there will think it's cool too, and sometimes it works out that way, but usually not. The reason is that if you are smart enough to have a brilliant idea then you (and most likely your buddies) are different from everyone else. I don't mean to sound condescending here, but the sad fact of the matter is that compared to you, most people are pretty dumb (look at how many people vote Republican ;-) and they care about dumb things. (I just heard about a new clothing store in Pasadena that has lines around the block. A clothing store!) If you cater only to people who care about the things that you care about then your customer base will be pretty small.

Myth #5: Financial models are bogus.

As with myth #2 there is a grain of truth here. As Carl Sagan was fond of saying, prophecy is a lost art. There is no way to know for sure how much money your business is going to make, or how much it will cost to get to market. The reason for doing financial models is to do a reality check and convince yourself that making a return on investment is even a plausible possibility. If you run the numbers and find out that in order to reach break-even you need a customer base that is ten times larger than the currently known market for your product then you should probably rethink things. As Dwight Eisenhower said: plans are useless, but planning is indispensible.

This myth is the basis for one of the most classic mistakes that geeks make when pitching their ideas. They will say things like "Even if we only capture 1% of the market we'll make big bucks." Statements like that are a dead giveaway that you haven't done your homework to find out what your customers actually want. You may as well say: there's a good chance that only 1 customer in 100 will buy our product (and frankly, we're not even sure about that). Doesn't exactly inspire confidence.

Myth #6: What you know matters more than who you know.

Reality: You've been in denial about this your whole life. You were either brought up to believe that being smart mattered, or you just didn't believe your mother when she told you that getting along with the other kids was more important than getting straight A's.

The truth is, who you know matters more than what you know. This is not to say that being smart and knowledgable is useless. Knowing "what" is often an effective means of getting introduced to the right "whos". But ultimately, the people you know and trust (and more importantly who trust you) matter more than the factual knowledge you may have at your immediate disposal. And there is a sound reason for this: business decisions are horrifically complicated. No one person can possibly amass all the knowledge and experience required to make a broad range of such decisions on their own, so effective business people delegate much of their decision-making to other people. And when they choose who to delegate to, their first pick is always people they know and trust.

Ironically, C programmers understand this much better than Lisp programmers. One of the ironies of the programming world is that using Lisp is vastly more productive than using pretty much any other programming language, but successful businesses based on Lisp are quite rare. The reason for this, I think, is that Lisp allows you to be so productive that a single person can get things done without having to work together with anyone else, and so Lisp programmers never develop the social skills needed to work effectively as a member of a team. A C programmer, by contrast, can't do anything useful except as a member of a team. So although programming in C hobbles you in some ways, it forces you to form groups whose net effectiveness is greater than the sum of their parts, and who collectively can stomp on all the individual Lisp programmers out there, even though one-on-one a Lisper can run rings around a C programmer.

Myth #7: A Ph.D. means something.

Reality: The only thing a Ph.D. means is that you're not a moron, and you're willing to put up with the bullshit it takes to slog your way through a Ph.D. program somewhere. Empirically, having a Ph.D. is negatively correlated with business success. This is because the reward structure in academia is almost the exact opposite of what it is in business. In academia, what your peers think matters. In business, it's what your customers think that matters, and your customers are (almost certainly) not your peers.

[UPDATE: this is not to say that getting a Ph.D. is useless. You can learn a lot of useful stuff by getting a Ph.D. But it's the knowledge and experience that you gain by going through the process that is potentially valuable (for business endeavors), not the degree itself.]

Myth #8: I need $5 million to start my business

Reality: Unless you're building hardware (in which case you should definitely rethink what you're doing) you most likely don't need any startup capital at all. Paul Graham has written extensively about this so I won't belabor it too much, except to say this: you don't need much startup capital, but what you do need is a willingness to work your buns off. You have to bring your brilliant idea to fruition yourself; no one else will do it for you, and no one will give you the money to hire someone to do it for you. The reason is very simple: if you don't believe in the commercial potential of your idea enough to give up your evenings and weekends to own a bigger chunk of it, why should anyone else believe in it enough to put their hard-earned money at risk?

Myth #9: The idea is the most important part of my business plan.

Reality: The idea is very nearly irrelevant. What matters is 1) who are your customers? 2) Why will they buy what you're selling? (Note that the reason for this could very well be something like, "Because I'm famous and I have a huge fan base and they will buy sacks of stale dog shit if it has my name on it." But in your case it will more likely be, "Because we have a great product that blows the competition out of the water.") 3) Who is on your team? and 4) What are the risks?

Myth #10: Having no competition is a good thing.

Reality: If you have no competition the most likely reason for that is that there's no money to be made. There are six billion people on this planet, and it's very unlikely that every last of them will have left a lucrative market niche completely unexploited.

The good news is that it is very likely that your competition sucks. The vast majority of businesses are not run very well. They make shoddy products. They treat their customers and their employees like shit. It's not hard to find market opportunities where you can go in and kick the competition's ass. You don't want no competition, what you want is bad competition. And there's plenty of that out there.

Special bonus myth (free with your paid subscription): After the IPO I'll be happy.

If you don't enjoy the process of starting a business then you will probably not succeed. It's just too much work, and it will suck you dry if you're not having fun doing it. Even if you get filthy stinking rich you will just have more time to look back across the years you wasted being miserable and nursing your acid reflux. The charm of expensive cars and whatnot wears off quickly. There's only one kind of happiness that money can buy, and that is the opportunity to be on the other side of the table when some bright kid comes along with a brilliant idea for a business.

All these myths can be neatly summarized in a pithy slogan: it's the customer, stupid. Success in business is not about having a brilliant idea. Bright ideas are a dime a dozen. Business is about taking a bright idea and assembling a team that can turn that idea into a product and bring that product to customers who want to buy it. It's that simple. And that complicated.

81 comments:

I am a graduate from Syracuse University's Entrepreneurship and Emerging Enterprises undergrad program. You really hit on a lot of key take-aways from school I had started to forget about. Reading your article has made me want to feel the head rush that can only come from entrepreneurship.

Pretty much right on Ron. I even have to agree with number 3- that no one will steal your idea. Or rather, if someone steals your idea it is a *good* sign. I have had lots of my ideas stolen (borrowed?) but it rarely hurts me. It was just a good idea and more than one can profit from it.

I would add to your list (well, it's related to some of the things you've typed):

Myth #11 "I am not incompetent"

Nobody will ever say/admit that they are incompetent. The fact of the matter is that in general, it seems that people can't tell the difference; that it is far too easy to overrate yourself. to avoid circular reasoning, i don't think i can say more. :-)

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And I would summarize some of the aspects on your list by saying that there are a variety of checks that can performed to determine that an idea *won't* work, but very few that can confirm that an idea *will* work. But I would add to your statements about a phd (and here i go, violating my #11) that learning a subject in depth can teach you a lot that is independent of what you're studying. there are a number of things that i feel i've gained a better understanding about that have nothing to do with science simply because i've developed a "vocabulary", a "basis set" if you will, with which to describe them.

Note about IPO's that no one talks about: you lose almost all negotiating power if you MUST go public (to repay venture capitalists or finance expansion)and will be stuck unable to sell any shares as long as you are associated with your company. The investment bankers will scream, " any cashing in on your part is undermining long term confidence in the company. And, oh, by the way, keep profits growing quarter after quarter forever or we will stop supporting your stock and it will tank. And, our fee will be 6% of all proceeds regardless of whether we underprice the stock or not."

[In case anyone has not been watching closely, investment bankers directly influence a lot of stupid short term thinking in much of corporate America though this kind of posturing and threats-- and MUST be held at least partially reponsible for providing incentive to place like Enron. They're not all evil, but there aren't any rich saints. And, yes, this insight comes from firsthand experience including in public company Board meetings.]

Myth 1 text: "To the contrary, Microsoft has achieved success largely by seeking out and destroying other people's brilliant ideas."

Myth 3 text: "No one gives a damn about your idea until you actually succeed and by then it's too late. Even on the off chance that you do manage to stumble across someone who is as excited about your idea as you are, if they have any brains they will join you rather than try to beat you."

My favorite had to have been #4, i think a mistake many geeks make. Successful companies think mainstream, and chances are, since you've endeavored yourself to starting a company, you are not representative of what is mainstream (and probably voted democrat) :)

Maybe I should have said, "...until you actually succeed and by then it's too late (unless Microsoft puts you in their crosshairs, in which case may God have mercy on your soul)."

Seriously though, if you ever get on Microsoft's radar, that means you've Arrived. You've made it. And you no longer need to take advice from me.

The point of myth #3 is that too many geeks worry about someone stealing their idea while it's still just an idea. That does happen, but it's so rare that it's not worth worrying about. More startups die from underexposure than overexposure.

I like this article, but I am still baffled. It seems to me that there are people with good ideas and maybe the ability to get their idea to the prototype stage (that's me), and there are people who are good at business. If I have a potentially good idea every day, it seems like an awful waste of time an effort for me to go down the route of amateurishly patenting it and starting a fledgling business, only to find that no venture capitalist will touch it, or that no customers exist for it. Surely it's the job of the businessman to spot the potential of a good idea, and to know how to exploit it. What people like me require is an organisation that, unlike the BBC's 'Dragons' Den', doesn't require an idea to be patented, nor any evidence of sales so far. Do such organisations exist?

Ron, your arrogant contempt of business and consumers as well as your anti-Republican animus makes your business acumen suspect. You seem to think business a kind of dodge, rather than a system of providing useful products to consumers willing to part with hard-earned money. Were I to seek venture funding for a startup, I would want neither you nor your money associated therewith.

your arrogant contempt of business and consumers as well as your anti-Republican animus makes your business acumen suspect

All my advice comes with a double-your-money-back guarantee if you're not completely satisfied, though I must confess I have a hard time understanding how a post whose central message is "It's the customer, stupid" (as opposed to, say, "it's the stupid customer") can come across as arrogant contempt for consumers.

" most people are pretty dumb (look at how many people vote Republican ;-)"

No. Most people vote anti-democrat (and therefore republican) because they're tired of psudeo-intellectual democrats telling them they're stupid if they feel differently on an issue. This elitism is (in my opinion) the reason the democrats keep getting their asses handed to them. Calling folks stupid is a poor way to get them on your side.

Fantastic post. Thanks for the wisdom and motivation.I am working evenings and weekends on my startup which is Mobile Banking.I printed your post and hung it on my wall to keep me on target.Thanks,Graemehttp://www.mobilearth.com/

There are the stupid people who vote Republican, and then there are the far more stupid people who think they can start a business to replace millions of miles of ethernet cable and related infrastructure with a brand new and unproven technology.

Furthermore: without dwelling on the point you were attempting to make...being well versed in C and Lisp, I'd have to say you're deeply full of it vis-a-vis programmer productivity in either language. C is naturally beautiful, powerful, elegant, and unobtrusive...then programmers come along and f*** it all up.

Now to the point you were trying to make about who you know...the reciprocal is more accurate; people have to know YOU. Are you a flake who's only thought is getting to that early exit...the one with the golden parachute? Or are you someone with acumen and resolve ready to see it through to profitability? And, by the way, no one will care to know WHO you are if you DON'T have the technical prowess to back it up.

I liked the article very much. Quite a bit I have heard from other successful entrepeneurs in books articles and speeches. I do wonder how Myth #4 (What you think matters) goes with what you said in Myth #8.

I believe in my ideas very much, though I do know that it isn't the only fuel required. I do think that you have to believe in your idea for all it's worth, or it definitly won't succeed, but you should make sure somebody wants it before you go to all that work as you point out many times.

Regarding stealing ideas, from an employee perspective: at my company we just wish the boss would get about the business of stealing our ideas and taking credit for them more quickly. The point is that they are good ideas, and implementing them is for the good of the company.

I would think twice about writing your own patent application, without professional review. It is fine if you do not anticipate competition, however in the event of patent litigation the nuances of the scope of the patent language can make the difference in an infringement case.

"No. Most people vote anti-democrat (and therefore republican) because they're tired of psudeo-intellectual democrats telling them they're stupid if they feel differently on an issue. This elitism is (in my opinion) the reason the democrats keep getting their asses handed to them. Calling folks stupid is a poor way to get them on your side."

There is quite a bit of difference between beliefs and reality. Sometimes if the belief is part of a belief system then there really is nothing to argument about. But if your belief system involves say, the state of race and ethnic relations, then it is counter productive to assume that others will not challenge your views if statistics are available.

I say this because although you may believe that gay marriage is the devil, the evidence contradicts that belief. So we should shut up lest we stifle your ignorance? I don't think so.

You sound just like every VC I've ever had the chance to hear from! "You don't need money to start-up" is the catch-22 every VC will feed you when you ask for money, and yet so many people who try to start without backing wind up working themselves like dogs and then get roughed up by rich late-comers.

As a developer, the top-ten list I would write now is probably 9 points different than what I would 6 years ago. I look forward to reading your follow-up after you've been around your new block.

Here's my bonus Myth: making your business attractive to investors is always a good idea. Sure, if you already have a network of trusted vc's, maybe you'd want to swap the post-its for a powerpoint. But energy spent prettying up your business for investors is a waste of time when that energy is better spent (yup) serving customers and (did you forget this one?) making a good-enough product.

What's interesting to me is that I think myths #3 and #10 are really more on the side of VCs than entrepreneurs. Most VCs I've talked to knee-jerk reject any business idea that already has players in the space, regardless of the fact that competition has really never had much impact on the ultimate success or failure of a company. I also have experienced VCs that stop listening if they think they have detected an idea that is "easy" to duplicate. What they seem to fail to grasp is that, like you said, ideas are a dime a dozen, but people who can successfully execute on an idea are the rarest of gems.

It is fine if you do not anticipate competition, however in the event of patent litigation the nuances of the scope of the patent language can make the difference in an infringement case.

Not really. In the real world, patents are pretty nigh worthless, no matter who filed them. Doug Lancaster wote about that early on, and he's right on the money: http://www.tinaja.com/glib/casagpat.pdf

Great post, except the totally inappropriate reference to republicans. Not that they are the best the world can offer but democrats are just not getting it the demands of the current world. As most American elite they think they know better yet in actuality being more like ostriches hiding their heads in sand. There is absolutely no difference between them and League of Nations circa 1938. But of course you wouldn’t know what I am talking about…

It is a bit old now but the one and only book I've ever read that, had I read it before starting my company would have changed what I did in countless ways, is "The Origin and Evolution of New Businesses" by Amar Bhide - see http://www.bhide.net/ for more info.

Written when he was teaching at Harvard Business School (he's now a professor at Columbia's Graduate School of Business) this is that rare book by a b-school professor that attacks many of the common myths of entrepreneurship and is based on deep research. One (out of many) of his takeaways being that business plans for many successful new businesses would have been counterproductive.

My advice to any business person, and especially to entrepreneurs, is to prove the market - that is get someone to pay you. Use that to provide value for them and to get your next paying customer (and repeat, often). Keeping in mind that who "uses" your service/product and who pays you may not, in fact, be the same people. If that's the case, prove that someone besides yourself would want to pay you (i.e. advertiser, sponsors, companies paying for data or services delivered to a community, etc).

This is hard. Many even established companies have a hard time explaining themselves - but the successful ones have found at least one, often more than one, thing they do that people will pay for far in excess of the cost of providing it.

Of course thats a myth! Why else would so many including you post your ideas and views here?

Myth #4: What you think matters.

Like what you think Matters!

Myth #5: Financial models are bogus.

Let me restate what the author is saying here. Bright ideas are useless, If you build they wont come, No one will steal your ideas, no one gives a shit about what you think BUT please please please use a "financial model" - And the author will be impressed!!!! Is the author confused between a "financial model" & a "fashion model".

Myth #6: What you know matters more than who you know.

If you know a lot of stupid dumb fucks who are rich and have their head up their asses, I am sure what you know wont matter. And you wont have to read this article - because what you know or learn hardly matters!!!!

Myth #7: A Ph.D. means something.

"We dont need no Eduction" - Look at it...thousands of educated and unemployed in the West. Why bother sending the kids to school? Coal miners rock!!

Myth #8: I need $5 million to start my business

Haha! If one wants to start a recycling plant to convert this fart into natural gas and heat homes this winter, even $5M is not enough!

Myth #9: The idea is the most important part of my business plan.

Ok I have to give this one to you! The idea is not that important. The Fashion oops Financial Model is.

Myth #10: Having no competition is a good thing.

The Author is so right again!

It really feels lonely at the top!!! I need some company. Can you please send over that all important fashion, errrr, I mean, the financial model?

This is a great post. It strikes a number of chords with my own experience of starting up a company (in my case, Enterprise web analytics software). One of the things I remember fretting about a lot in the early stages of starting the company was the amount of competition already in the marketplace. But the competition obligingly did a number of extremely stupid things (so did we, mind you, but that's another story), providing a great opportunity for us to differentiate.

The idea is not irrelevant, it is pretty much everything because a real "idea" incorporates all the subsequent points you claim are more important. An idea is a product/service that meets a real need of a profitably substantial group of consumers in a better way (as defined by the consumer) way than any existing competition. Yes this has to be executed well but, without the idea, all the execution in the world won't help.

Thanks for the post. It was fun to read, and very close to home since I'm, uh, your direct target market. I'm on the tail end of a two year project to create, wait for it, an email campaign marketing program (NOT for spam). Yes, a completely novel idea, I know. Ah, who cares, there is plenty of room for competition out there. I've done a couple of interesting things that will actually make it unique (it does both personalization and customization), and worked for almost 2 years on it, evening and weekends, with a small team (the second, the first team fell apart pretty quickly, but thats another story). I feel like I'm in a strong position now because going to market I have low debt, no partners, little risk (really only my investment is on the line), and fairly low overhead. The plan is to provide an interesting product that is easy to use and costs less than the competition. Thats not too novel either is it? Ha, I must not be too original! ;)

Anyway, the the software just works, and I have a knack for GUI design so have gotten good feedback on the look and feel so far. Its called Circumail, and you will find it at http://www.circumail.com in 1Q 2007.

In many ways you are right that the idea isn't important - its how the idea is brought to life that counts.

So, now that I've told you my own story, um, may I ask for some further help? Can you offer me any suggestions on how to go to market (books/articles especially)? I've read the Purple Cow and it had some interesting ideas, but I know there is a lot know, and a guidebook of some kind might be invaluable.

That was some good stuff. I'm in the process of starting a business and I hope to review these every now and then to stay (or get back on) track. Also, because my company IdeaTango.com employs a unique business model for an online site to buy, sell, and exchange invention ideas, patents, and other intellectual property, I'm always afraid that someone might come along and steal it. This article helps alleviate some of my concerns. I'm writing about my life as an entrepreneur at: The Daigle Blogand my company can be found at: IdeaTango.com.

In conjunction with the "it's not what you know but who you know" idea, there's also a prevalence of entrepreneurs who are good at things to think that if they are _able_ to do something, they can do it _well enough_. For instance, I know how to make pretty brochures and stuff but I couldn't successfully market a scuba tank to a drowning man -- that is, I am _able_ to do something that is like marketing, just that what I do is pretty bad.

What I'm getting at is that people with a jack-of-all-trades mindset often fail to delegate a task unless they are absolutely awful at it. It's a myth to think that because you are able that you shouldn't seek help.

Ron, I'm helping to a blog for a startup called Exbiblio based in Seattle http://blogs.exbiblio.com. It's very open about what it does. If you have a moment, take a look... It might make interesting reading in light of your post.

As CEO of a startup called Vibe Technology, I've spent the better part of a year choking on the truth of these myths.

Bravo, Ron.

I've managed to survive by one angel investor in the hopes that I could "pretty-up" the "fashion model" for real VCs. No luck so far.

Chanting the counter-myth mantras in my head, I designed and built everything by myself - from storage, web and email servers to the graphics on our stationery.

Now I watch with sadness as Google, YouTube, Pandora and Apple run away with my ideas.

As for the rest, here's my thoughts:

» Yes, you can start a business on a shoestring, but remember that it takes money to make money.

» No one will steal your idea because nothing is really new. "Unique" ideas are just interesting solutions without a real problem.

» Leaders die on the edge. Better to be a fast follower. However, you'd better be damn fast or whatever idea you have will leave you behind.

» While the idea isn't the most important, others have said it right - VCs want "intellectual property" and "barriers to entry". This means there'd better be *something* sophistocated in your offer

» Finanacial plans PISS ME OFF. I've been through too many companies where this is the most ridiculous SWAG you can imagine. You've got a new solution in an emerging market. How in the hell can you assure anybody that three layers of distribution will buy it without GUESSING?? However, I agree: if you want someone else's money, you'd better have a sound financial plan.

» It is a tough world and the winners write the rules. Get used to it. In fact, learn to enjoy it - one day you'll be on top and get to torture the rest of us with your "this is how good business is done" diatribe.

So where are you supposed to draw the line between "I can do this" and "this is better handled by someone else"?

I've met many people faced with the problem that they're simply missing one or a few people on their team; but when they go to the average VC-person they're told that it's better that they take 3-4 times as long to release a working service/product than that they get the money needed to hire that extra person/people.

Sure, the risk would be a lot less for the VC-person if there's a working product for him to invest in a year from now; but the risk for the people doing the real job increases hugely.Not only do they risk that someone else is going to release a competing product/service backed by a major player during the extra time, but they also risk not getting VC after a year. Instead of launching their business within maybe 3-4 months they're faced with having to work their butts off for a year to then just have to watch while someone copies their work without these original developers having a chance to seriously compete.

These people don't go to venture capitalists because it's impossible for them to complete their work without venture capital, nor because they don't believe in what they do, they go to the venture capitalist to reduce the risk of failure. They're also often willing to give away a bigger part of their company than the venture capitalist asks for.

So, they get turned down and now they have to ask themselfs what to do... Do they stick to their pretty ok lifes and spend more time with their family, use their not that bad financial situation to buy a plasmatv and go on a fun vacation; or do they spend a year working their asses off while not having any extra money, and if they succeed then maybe that venture capitalist is willing to get into it and get rich(er)...?

THAT's the way that many people looking for VC view it; they see a leech-like venture capitalist without any visions or ability, nor willingness, to look at their ideas/work beyond some numbers on an excel sheet... and the venture capitalist sees a bunch of people that don't believe enough in their work to seriously invest their time and money into it...

People with ideas are from Mars, and venture capitalists are from Pluto (no, I'm not taking sides, what makes you think that? ;)).

Fair enough, Ron, I guess; but aren't we then basically saying that by rule of thumb a fledgling enterprise looking for venture capital is mainly of interest to a venture capitalist once it stops needing venture capital...?

That might sound a tad bit pessimistic, so let's rephrase it like this:

Most people looking for venture capital want it to create a business, but most venture capitalists are looking for businesses that want to expand.

The traditional venture capitalist is then of no interest to the average VC-hunter, they just wrongly think so and might waste time on what most likely is a dead end (time better spent on improving their position to become of interest to the venture capitalists).

What I see here is a need, or at least an opportunity, for a PR/marketing-team: Instead of a traditional business angel they don't work with your business/ideas, but they work with how your ideas are presented - basically turning "I'm a geeky ph.d. from the local university, and I've got this really cool technical solution for which I need to hire 10 people to change the world as we know it" to a professional presenter saying "I'm representing a think tank working on expanding the technical innovations from the university into the business world; and here we've got [this] mature project".

If you were to ask the geeky guy how long that think tank's existed he'll say something like "we just got these cool business cards yesterday"; the professional presenter would say "this is the result of 5 years work", as that is how long the geeky guy he's representing has been working on this idea.

Sure, there's a limit to how far you can stretch the the truth (in either direction), but the difference between wanting to start a business and having an existing business to expand can often be as simple as state of mind combined with how well you've documented the stuff you're working on. A PR/marketing-group could take you from "idea" to "ready to expand" in less than a month, without really changing that much to what you've already got.

What would a lot of idea-people out there be willing to give up for such an "extreme business make-over"... Well, how much would you be willing to give up to leave a boring job/school/partents basement to work on your pet project fulltime?! The PR/marketing-people could get anywhere between 50%-80% without losing many of this kind of client; at the end of it all the idea-person might not really care that much about owning (a part of) the company, just his work and some bonuses every now and then.

But, if a PR/marketing-team could do this to make a project look more attractive to a venture capitalist, then why couldn't the venture capitalist just demand more control of a (future) company to invest his time in an earlier phase himself? Basically have a team of a few marketing/design-people and programmers which, maybe for a share of the project, take these immature projects and see if they can get some life into it in a cpl of weeks time... if the project survives the first cpl of weeks they put some more time into it, and maybe start hiring...

I'm just questioning the role of the traditional venture capitalist, and asking if he'd be more profitable if he adopts a strategy which would gladly be accepted by some that he currently sends away.

a fledgling enterprise looking for venture capital is mainly of interest to a venture capitalist once it stops needing venture capital...?

It sounds like a catch-22 but it's actually not so far off the mark. But you can put a less-ironic spin on it and say that we're looking for businesses that can make effective use of capital, not ones that need capital (i.e. will fail if they don't get it).

Most people looking for venture capital want it to create a business, but most venture capitalists are looking for businesses that want to expand.

All else being equal, yes, we'd prefer to invest in a going concern because there's more information that we can use to manage our risk. But all else is never equal. (I should probably write a separate post about all this but I don't have time right now.)

What I see here is a need...

Good! For every need there is a corresponding business opportunity. Go for it.

Hit the nail on the head for the most part. I especially agree about the PhD myth. For me I think that extends to a college degree at all. I would be very hestitant to hire anyone without a college degree, but the greatest thing I got out of college was the journey, not the academics.

I actually saw the lines of people waiting at the new clothes store in Pasadena, this was three days after the Grand Opening.

Great post, I am not from the tech business world and I am awlays amazed at the differences in expectations compared to start ups in other industries. You have outlined some important points here.Thanks,

About Myth #9. Although I agree, I have a simple question: how do I get a 'team' -- without asking for & spending other people's money that is.

Although I have the handicap of having a PhD to overcome :) I have been around long enough to know & appreciate my strengths & weaknesses. Unfortunately, as a techno-geek (and a programmer at that) my relevant team building skills have been limited at being a successful and effective team leader of other techno-geeks. In each of those situations, however, the team to lead had been recruited / assembled by an employer or client.

My few past futile attempts to hire my own employees in some ventures did not work out too well. Of course, most people expect a regular pay-check.

Although that maybe isn't the best example of it, I think that we can agree on one thing: Venture capitalists and those looking for venture capital are often speaking different languages.

Computer-geeks are often a lot like scientists (of the Einsteinian type); meaning that instead of saying "I saw a market need for a theory regarding [this&that]", they're talking about something new, something never done or discovered before...

The average person on the street can, when reading that, relate and understand that side of it all; when you explain to that same person that there are lots and lots of new ideas out there, but that for the venture capitalist to be able to invest in an idea he must be able to see that there will be some kind of paying customers (let it be that they look at ads or really pay in $$$)... the average guy on the street will understand that also.

So where's the problem? If just about anyone can understand that, why can't these computergeeks, that are supposed to be so damn smart, understand it and focus on the need that they're targeting?

That can be explained by a single word: Culture.

Each and everyone of us living in a certain part of town, hang out with a certain kind of crowd or come from a certain country have, statistically speaking, certain characteristics.

Computer geeks often impress eachother with what's new, and they can often have an Asperger's disorder-like personality/be introverts; and on top of that a high IQ/be damn smart and really really know the stuff that they're doing.These people are often used to talking to other people with a well above average understanding of what's going on within their field; and people within the same field can easily extrapolate/logically explore what you're saying so that they can instantly see what's so new/fantastic about what you're doing even if you just say a few words.

If you're more "normal" and outside that field you'll have a very hard time understanding not only what they're doing, but also the implications of that work/discovery.

The culture from which that geek comes (combined with his personality; and you could here discuss if his personality attracted him to that culture, or if that culture at least partially formed his personality) makes him want to take second seat and let his work do the talking; after all, his work is what makes him king of the nerds and very suitable to get invested in, right?! As we already know, that's wrong; maybe not because he's wrong, but because there's way too much lost in "translation" for the venture capitalist to understand the value of the one sitting infront of him.

Here's an example for the non-techie/math people out there; you're asked to invest everything you own in this (and we do assume that it works, so there's no risk that there's anything wrong with the math behind it nor that computers of today wouldn't be able to handle it), so all you really have to figure out is if there's a need for it, if that need is great enough and what the real world implications would be:With a 10% increase in signature-length the MD5-algorithm becomes collision-proof and fully reversible.

Give up? Well, if your Internet-access is still by dial-up modem then the above (fictional) breakthrough would result in you being able to download in minutes or seconds what before would take you many many days... HD-video could be sent by standard SMS to your cellphone... You'd be able to install several independent huge software-packages into non-networked computers simply by typing less than a blogposting... and you'd never be able to fill up another harddrive because of downloaded movies (at least not if you intend to view just a fraction of them before you die of extremly old age).

Not a bad thing to invest in, but if you didn't understand the implications while the presenter focused on the math behind it all instead of the need, then you wouldn't invest a cent.

That's an extreme example, and most people can view computer geeks as an extreme(ly odd) group of people; but the same works for most groups approaching venture capitalists, no matter how "normal" they might seem to be. They know what they know, and they are looking for both money and financial expertise to take what they know and package it for everyone else.

These people usually need more people to get their work done, or they at least need more people being available to work, so they tend do describe their needs based on the number of people needed; this might sound logical, but it's a huge problem for people talking to venture capitalists.

You might include a 3 people team doing such things as designing/programming/supporting the website, getting graphics done for your stationary/business cards/business sign and so on. 3 people isn't a lot, and you see them doing a lot of different things so you want them to be very efficient and able to do more than just work within their own core-area; they need to be able to run to the printers to pick up everything, deal with the printers regarding price and quality, talk to some other companies about the electric sign for outdoors and so on...

Finding the right kind of people for that will take you a very long time, and if they really are good enough to handle all that then they'll know to charge you both arms and legs (as well as your first-born for 3 generations) for their services; you'll both waste a lot of time and you'll scare off the venture capitalist by saying that you want to get stuck with those kind of people on the payroll.

So what's all that in more suitable venture capital-speak? Perhaps a one time fee of anywhere between a cpl of hundred and a cpl of thousand to have it all outsourced to a company specializing in that; and that's only to be paid when you're close to going public, not from the first day of development.

What's the word of the day, kids? OUTSOURCE!

On your list there might be 2 people working support, but they're not really needed either until your business starts taking off; so they're off the list, and depending on what kind of business it is you're starting the secretary answering the phone or the programmers will do the support initially... Secretary? Yeah, some people think that those are needed from day one, but most likely an automated system can do that work initially (setting up the automated system is outsourced to the VoIP-guys handling the phone; the automated system could be included, or added for free just to make sure that they get your growing business).

And you can keep doing that, outsource or remove people so that you're down to maybe half or even fewer of the people that the venture capitalist-seeking person initially thought he'd ask for.

Venture capitalists don't want to turn any clients away, they don't want to have a huge bank account just sitting there collecting dust (and a at these times quite modest interest)... they want to invest... they want to own a piece of the next Bill Gates... they want to get in on the action before the company name risks verbification and the whole company risks being reclassified as a mutual fund due to all the money it has (Google)...

So why don't they accept and learn how to understand those other cultures, so that they can spot the good ones and do business at an earlier stage and with more people?!

Well, they're trying to, every now and then a geek/scientist starts working closely with a venture capitalist to help him find these treasures; the problem is that the dark force is too powerful, so they are almost instantly turned into business/VC-people; and not before long they're telling the other geeks/scientists how wrong they are by writing lists about "geek business myths"... (Sorry, Ron, I just had to... ;-D)

Before meeting a venture capitalist the venture capitalist should send out a single paper listing what he's really looking for, and especially what it is that he wants to hear during the first presentation (like: "focus on the need, the tech. behind it all will anyway just get looked at and verified by someone else than me"); then directly after the initial and somewhat short presentation they should sit down so that the venture capitalist can, quite frankly, say what was wrong about the presentation.He'd cut people and reprioritizes like I did above, say what he heard too much about and what he didn't hear about at all or enough about.

That'd just be a trial-run; instead of letting the poor money-seeking guy talk himself blue by saying the wrong things for two hours, that could be over in an hour. Then he's less nervous, more focused and a hell of a lot better prepared for the second, the "real, meeting/presentation.

Could you really do that? Could you really risk losing that important first impression by having a trial-run? In some cases you can, and in some you can't... But what most people don't know is that there are organizations all over the world that will help you do such trial-runs; some will help you for free (sponsored by local governments or businesses that want to attract more businesses to the area; including some venture capitalists), they'll collect some of the local business leaders to listen to and comment on your presentation, and they'll make sure that those business leaders aren't in a situation that they might be tempted to steal your ideas, not to mention that they'll have all the paperwork set up to help clarify any and all later missunderstandings regarding such things.Such events will not only provide great feedback, but they might also give you your first clients... Some might even give you a downpayment, making it possible for you to start without the help of a venture capitalist, or to greatly enhance your chances when later on talking to a venture capitalist.

Start by going to your old/current school's website and look for any information about helping people start businesses; for the past 10 or so years more or less all schools at university-level have focused more and more time and money on helping their students created businesses around the work they're doing.

Then drop by the business/economics- (or whatever it's called in your parts of the world) department, there you'll find people better than you at running businesses; they might lack experience when it comes to running real world corporations, but unless your school really really sucks they'll be used to working in teams and they'll have all the theory needed stuck in their heads.

The people there are still studying, so they don't know everything there is to know about doing business (then again, who does?); but they'll be years ahead of you, and they can help you turn what you want to say into what the venture capitalists wants to hear.

This is not a particularly good example because you can easily prove that it's impossible.

Well, Ron, that might have had something to do with why I called it a fictional breakthrough and wrote "we do assume that it works"... not to mention that I targeted it towards "non-techie/math people" (implicit: those getting lost somehere around "signature-length").

But you knew that, you're just upset with me because I write too long comments, and because I had a little fun at your expense. ;-)

Seriously though, I did consider using a never released project as example; as that would have allowed everyone to follow it from "this is the tech. that I've developed" to "this is how I would need to explain it to emphasize the market potential". My reasons for not doing that was:1. It would have taken up too much room in an already too long posting.2. It would have opened up a possibility for a seriously off-topic discussion where I might have had to defend any details in, and any information lacking from, the description of my work. (It's hard enough to present several years work without someone questioning some step somewhere, it's bloody impossible to do it in just a few sentences in an open forum/blog.)3. It could have been viewed as, not to mention start a wave of off-topic discussions regarding, if I was just doing a "look at me, look at me, give me money, give me money"-thing.4. It's my pet project; it's created out of a need most people have (I started working on it to fix that problem for myself), and I'm working on it from the bottom up as if I was going to present it to either a venture capitalist or sell it... BUT... it's a pet project... Something that I'm working on because it's fun, and keeping it up2date to take advantage of/adopt to the latest developments/changes in the world is a lot of fun, and very interesting. Why let strangers pollute such pure geek-happines? ;)

(BTW, people reading my comments here... please remember that English isn't my language of choice, so the language might be a bit off here and there; feel free to complain about it to me by e-mail at tony@svanstrom.org.)

you're just upset with me because I write too long comments, and because I had a little fun at your expense.

Your ESP lessons are serving you no better than your computer science training. I'm not upset with you, I just disagree with nearly everything you said. But I didn't (and don't) have time to write a detailed critique so I decided to just go for the low-lying fruit. You picked a bogus example and I called you on it. The proper response would be to pick a less bogus example. (But you may find that that is not such an easy thing to do. Bonus points for anyone who can explain to Tony why that is.)

Well, coming from yet another person who started with a subsequently de-bogused "breakthrough" idea, I suppose the point for Tony is that such things rarely exist in the first place - the winners execute more efficiently, not necessarily upon a breakthrough.

Build your example on a known good business - there are plenty of them.

But I digress. How about skipping the coffee house chat and getting down to business?

Ron, are you ready to fund a company focused on Highly Targeted Advertising for music and video? Vibe Technology will do for media content what AdSense did for direct marketing text ads.

Ron, I didn't think you were truly upset about that, it was just a joke... personally I thought that would be more or less obvious even if I hadn't added a smiley, which I did... oh well.

When it comes to me picking a "bogus example" I honestly don't see why you have a problem with that example, as it doesn't matter if it works or not in real life as I've stated that it works in the example where people were to chose to invest or not; and I said that the whole exercise only worked if they didn't understand the implications... The whole point was for at least some to get a smallish feeling of how important it is to not over-estimate the impact of the raw data you're presenting.

#1: Only if A works it is worth a lot of money.#2: A works.#3: The reciever must understand #1 to invest.#4: The reciever doesn't understand #1.Result: The reciever doesn't invest.

If talking about problems related to communications the example works (if talking with the right people) to get the effect of them reevaluating how they're going to present their work; an example that makes them question what they assume is true is a hell of a lot better than just saying "make yourself understod".

What's the problem with agreeing to accept something easily defined for a fact just to easier prove a point, which is true for all forms of that structure where the fact you're initially using is true?

When it comes to me picking a "bogus example" I honestly don't see why you have a problem with that example, as it doesn't matter if it works or not in real life

Of course it matters. Your thesis is:

If you're more "normal" and outside that field you'll have a very hard time understanding not only what they're doing, but also the implications of that work/discovery.

When you're arguing that someone "will have a very hard time understanding" it tends to undermine your position if you have to ask them to suspend their disbelief and pretend that your supprting evidence isn't bullshit.

All good stuff. You are right about the idea being the easy part. It is also the most fun. The adrenelin rush when you think you have something is like discovering gold. Cheap thrills, indeed, since nothing is gained or lost until the implementation begins, then execution and determination are everything. I've had hundreds of "hits" on the Eureka bong, but have yet to turn any of my ideas into reality. Still, I haven't given up. It beats Crack, and I'm getting closer...I think.

I started a business in personal training a few years ago. I don’t actually do personal training. I just started it for bragging rights. Immagine after 20 years of having my own business. Most businesses fail in the first 5 years. My business will last 30 easily, ahahahahahah!

"Reality: No one gives a damn about your idea until you actually succeed and by then it's too late."

I'll have to (partially) disagree with this one. It's not entirely false, but it's still missing something. Most of the people wouldn't give a damn about your idea, but there are some that have a different way of thinking, the "I can do it better" way, and these are the ones that will steal your idea and implement it in a slightly different way. If you have a great business idea, then you should be very careful with whom you share it.